The Federal Reserve will buy up to $500 billion in mortgage-backed securities early next year. This marks the first move by the agency that may actually help turn the credit markets around quickly.
The Fed has tried cutting interest rates to 0%. This does not seem to have improved lending by banks. It has also allowed banks to use its emergency lending window to trade securities with questionable value for cash to build their reserves. This has not done much to improve bank balance sheets, earnings, or lending.
Finally, the Fed is headed back to the major cause of the current market's troubles, the housing market. The Fed cannot go into the marketplace and refinance every single mortgage that is in default or underwater -- in terms of its relationship to the actual equity in houses. But by buying the securities, it can improve that value that is attached to that part of the economy -- the MBS.
Most of the hundreds of millions of dollars in bank losses over the last few years were due to the falling value of MBSs. With housing prices still falling, the value of underlying derivatives is still in trouble.
According to Reuters, "When they are buying along the lines of $80 billion to $100 billion a month, if they're going to do it in six months, they have to buy everything they can get their hands on," said Kevin Cavin, a mortgage strategist at FTN Financial in Chicago.
It is the first government program that will help both home owners and banks at the same time.
Douglas A. McIntyre is an editor at 247wallst.com.
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Reader Comments (Page 1 of 1)
12-31-2008 @ 9:17AM
BHarrison said...
I've simply run out of sympathy and empathy for those who bought homes that they could not, and could never afford to purchase on their incomes. These people were just "gaming the system" . . . gambling that that something would occur, such as even MORE appreciation of the value of houses, to enable them to "somehow" manage to own a home that they could not afford.
That is the "bottom line" to all of this. Yeah many of them were gullible, and allowed themselves to be talked into doing that by realators looking for sales commissions; but some of them were intentionally and knowingly "gaming the system" . . . and the initial mortgage payments WERE CHEAPER THAN RENTING at that time.
it really isn't any different than being talked into buying an automobile that you can't afford. Just because it is housing, doesn't make it any different. When you buy something on credit that you can't afford, then you have created a personal financial problem . . . which is YOUR RESPONSIBILITY.
The same applies to those who used their equity lines of credit. Many people used their equity lines of credit to boost their life styles with plush vacations, buying cars, and all sorts of other "luxuries".
Now the government and the FIs want EVERYONE to "chip in" to solve the problems that THEY PRIMARILY CREATED. Yeah the government was heavily complicit in all of this by their failure to provide reasonable regulation and oversight . . . the same as with Madoff's Ponzi scheme and the SEC.
All of this has gone on long enough; 30% - 50% of those who have had their mortgages renegotiated have ALREADY DEFAULTED a second time. It's time to let the chips fall wherever they may fall.
If people cannot afford the mortgages that they contracted, then they need to move into smaller homes or go rent something that they can afford. I've already lost $30K in all of this; and I didn't participate in abusing the systems.
Enough is enough . . . people simply need to adjust to whatever they can afford. Yeah, it is going to be difficult for many of those who tried to "game the system"; BUT that is THEIR PROBLEM, not mine.
Those of us who did not participate in any of this have ALREADY incurred substantial losses due to the irresponsibility of these people. Why should we go any further in "bailing out" these individuals? Massive economic damage has already been done, and put into motion . . . the massive layoffs, the closing of companies, etc. . . . We just need to let the REGULATED Free Market Economy straighten out this mess.
I haven't seen Congress come up with any significant legislation for implementing reasonable and prudent regulations or any type of significant oversight either. What in hell is Congress doing?
Now that the Holiday season is over, I suspect that most people are going to "tighten their belts" even more.